Global Financial Crisis

Overview

The collapse of financial services firm Lehman Brothers on 15 September, 2008, triggered a worldwide economic collapse, the effects of which are still being felt today. As uncertainty reigned on Wall Street, banks virtually stopped lending to one another, stock markets plummeted, and multiple major financial firms either entered bankruptcy, or came very close to it. With global demand falling at a pace not seen since the Great Depression of the 1930s, unemployment spiked around the world, trade volumes collapsed, and liquidity in the market place became increasingly scarce. Although global economic growth has recovered somewhat since 2008, it is still much lower than pre-2008 trends, and the hangover from the crisis has manifested itself in the form of high unemployment levels throughout much of the developed and developing world, as well as an increasing level of inequality both within and between countries.

As political leaders initially rushed to prop up the ailing global financial system, stimulus packages worth trillions of dollars were quickly implemented within key global economies. In particular, at the invitation of United States President George W. Bush, the group of twenty (G20) economies assembled at the leaders' level for the first time ever in mid-December 2008. Tasked with halting the global economic freefall, G20 leaders proceeded to sign off on an ambitious package of policies at the G20 London Summit in April 2009 that called for collective stimulus injections, global economic reform, and a commitment to work towards a set of global financial rules that would reduce the chances of such an international economic crisis happening again. Australia was a key contributor to these discussions, and has generally been recognised as having implemented one of the most effective domestic stimulus responses to the global financial crisis. To a large degree, the actions of the G20 economies helped to reverse the trajectory of the crisis. Analysis of the G20 process is the primary focus of the Lowy Institute’s G20 Studies Centre.

Yet although the freefall ended around early to mid-2009, the global financial crisis managed to expose multiple weaknesses in the global economic system that have continued to serve as a brake on global economic growth. This includes the fiscal precariousness of the European Union. With many major European economies forced to use public funds to bail out privately managed banking entities, so as to stave off ongoing crisis, the debt/GDP ratio in European economies boomed. As holders of European debt became increasingly nervous about the capacity of less well-managed European governments to meet their debt obligations (principally those from the unfortunately named ‘PIIGS’ – Portugal, Ireland, Italy, Greece and Spain), bond premiums spiked, and the risk of European economies being unable to meet their debt repayment schedule led to a secondary slow-rolling, but highly damaging, European economic crisis.

The situation in Europe was made all the more difficult due to the split between the centralised monetary authority at the European Central Bank, tasked with setting interest rates for all of the EU, while EU members themselves were responsible for their own fiscal environment, and unable to draw upon monetary measures as other non-EU countries have sought to do.

The global economic crisis has pushed much of the world into an uncharted macroeconomic policy environment. Extraordinary monetary policy responses have been implemented in the United States, Japan, and more recently in the European Union. Revaluation has also taken place with respect to China’s RMB. This volatility of policy settings has seen massive amounts of capital flowing in and out of emerging economies, often at a rate that has had negative repercussions for fragile economies that are not equipped to deal with such dramatic reversals. Major emerging economies, particularly led by China but also other countries in East Asia, have also found themselves in a relatively stronger position with respect to the industrialised G7 economies (arguably) much sooner than had been anticipated.

What the Lowy Institute does

The tremendous changes, shifts and redistribution of global growth that have occurred in the wake of the financial crisis have been central to the analysis work of the Lowy Institute’s International Economy Program. Researchers at the Lowy Institute provide regular analysis on the fundamental transitions occurring within the global financial, trading and economic governance systems, through analysis papers, books, public panels and also on the Lowy Interpreter.

This article was orginally published on 7 February and has been reposted following legislative change this week in the US.
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